Consumption, euro zone recovery lift German growth: Ifo

FILE PHOTO: People carry bags outside a shopping mall on the last day of Christmas shopping in Berlin December 23, 2014.Hannibal Hanschke

BERLIN (Reuters) - Vibrant domestic demand and strong export growth fueled by a recovery in the euro zone will boost growth in Germany this year and next, the Ifo economic institute said on Tuesday, raising its 2017 growth forecast for Europe's largest economy.

"We're experiencing a first half which is so strong that the impetus will carry on into the coming year," Timo Wollmershaeuser, head of economic research at Ifo, said in a statement.

Ifo raised its growth forecast to 1.8 percent from 1.5 percent, adding that risks linked to Britain's decision to leave the European Union and the election of Donald Trump as U.S. president have receded since the start of the year.

"We assume the Brexit negotiations between Britain and the EU will go ahead without much turbulence, and an exit plan should emerge early on without any major negative effects on the economic interdependence between the EU and Britain," said Wollmershaeuser of the talks which began on Monday.

For 2018, the institute predicts Germany's gross domestic product will expand by 2.0 percent, up from the 1.8 percent it had predicted previously.

"The upswing is being driven by the domestic economy, especially construction and consumption," Wollmershaeuser added. "But now we have industry too. The improving economies of the euro zone and the rest of the world are significantly boosting exports."

Consumption, construction and state spending have been the main growth drivers in Germany as exports have gradually weakened. These three pillars of growth have been supported by a robust labor market and the low interest rate environment created by the European Central Bank's expansive policy.

Ifo expects there to be 44.2 million people employed this year, an all time high, compared with 43.6 million last year. That would be coupled with higher inflation, reaching 1.7 percent this year and 1.6 percent in 2018, compared with 0.6 percent in 2016.

It said it expects the ECB to start exiting its bond-buying program next year as the recovery in the euro zone firms up.

Ifo's improved outlook chimes with the projections of Germany's central bank, which has raised its growth forecasts for the German economy to a workday-adjusted 1.9 percent in 2017 and 1.7 percent in 2018.

Still, Economy Minister Brigitte Zypries said in a Reuters interview last week that the government was sticking to its more cautious growth outlook for Europe's biggest economy despite solid economic data and upbeat sentiment indicators.

The government said in April that it expected an economic growth rate on a non-adjusted basis of 1.5 percent in 2017 and 1.6 percent in 2018.